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Foreign direct investment is an investment by a firm from one country in a business that it controls in another country. This can be contrasted with an investment in stocks by foreign investors whereby the investor doesn't exert significant control over the business. The following are illustrative examples of foreign direct investment.
Mergers & AcquisitionsA large Germany cookie company acquires a smaller Italian cookie company for cash. The amount of cash transferred for the acquisition can be viewed as a foreign direct investment from Germany to Italy.FacilitiesAn American technology company builds and operates a data center in Canada. This is a foreign direct investment from America to Canada.
ManufacturingA Canadian sporting goods manufacturer builds a factory in Thailand.Sales OfficeA French software company opens a sales office in Brazil to reach the Brazilian market with their services.RetailA Japanese fashion brand opens a retail location in London.A Czech furniture company opens a warehouse in Rotterdam.AdministrationAn American electronics manufacturer opens a satellite office in China to procure parts and manage suppliers.
ServicesAn American bank opens a customer service center in India to serve American customers.HorizontalHorizontal foreign direct investment occurs when a firm replicates its entire organization in multiple countries. For example, a Japanese ecommerce company that builds out an American ecommerce company with administration, sourcing, logistics and data centers all based in America.Joint VentureA German and Japanese train company form a joint venture to assemble high speed trains in Japan. The German portion of this investment can be viewed as foreign direct investment from Germany to Japan.
An Dutch information technology company opens a research and development center in India.Notes(1) The difference between foreign investment and foreign direct investment is that direct investors control the management of the organization accepting the investment. This can be partial control but must be significant control. For example, an investor who buys 10% of a company does not "control" it simply by voting with their shares. However, a firm with a 10% interest in a joint venture might control it by placing their own management teams in the firm.(2) Nations tend to welcome and encourage foreign direct investment because it creates jobs and tax revenue. |
| Type | | | Definition | An investment by a firm from one country in a business that it controls in another country. | | Related Concepts | |
International Economics
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